Global Impacts and Implications of COVID-19 on Utility Finance · The U.S. stock market has been surprisingly robust (esp. ... Global Stock Prices. All of the broad market indices

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Global Impacts and Implications of COVID-19 on Utility Finance

PREPARED BYBente VilladsenRobert MudgeFrank GravesJosh Figueroa

INTERNATIONAL ASSESSMENT

Tess CountsLily MwalengaShivangi Pant

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Purpose and Caveats

This assessment considers the implications of COVID-19 for electric utility cost ofcapital in 12 countries. It draws upon the observations of two recent past Brattle assessments of COVID-19 effects on

energy market demand and prices more generally. The pandemic continues to impose tragic personal losses on millions of persons and to have

devastating effects on healthcare, education, business activity, and employment. Despite relaxed social distancing, there are meaningful concerns that there will be long term effects

that could last well into 2021. Regulators face an acute near term challenge in protecting the current generation of customers

already battered by the pandemic without gutting the ability of utilities to serve. In light of historically low interest rates, it is natural to ask whether utilities’ overall cost of capital

has gone down in a way that could be passed through to customers. However, many heightened financial indicators suggest this would be vastly premature to conclude

at present.

This assessment reflects the perspectives and opinions of the authors and does not necessarily reflect those of The Brattle Group’s clients or other consultants.

Copyright © 2020 The Brattle Group, Inc. brattle.com | 2

https://brattlefiles.blob.core.windows.net/files/18900_impacts_and_implications_of_covid-19_for_the_energy_industry_-_brattle_-_may_8_assessment.pdf

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Agenda

1. Overview

2. Brief Comparison of COVID-19 in Various Countries

3. Global Financial Sector Impacts

4. U.S. Financial Sector Impacts

5. Country-Specific Details (Appendix)

Frame of reference: We have treated January 1, 2020, as the beginning of the significant influence of COVID-19 on the global economy.

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Overview – Macro and Financial Market Impacts

Comparing and relating economic consequences of COVID-19 across countries is difficult, not least because the severity of outbreak can only be measured very imprecisely with reported infection and death rate statistics, either in total or per capita. Sometimes those are not similar within a country’s

experience, depending on age of population, type and timing of response (lockdown, testing, etc.)

E.g., although the U.S. has the highest amount of reported cumulative infections per 100K people, it falls in the midrange of other countries in terms of death rates, while some EU countries have low incidence but higher deaths per 100K people.

Likewise economic impacts are heterogeneous, depending on such factors as mix of industries, dependence on exports or tourism, and policies in place or introduced for economic relief. E.g., much of Europe has employment continuity policies in

place, while the U.S. needed the Paycheck Protection Program stimulus to provide unemployment relief.

The U.S. stock market has been surprisingly robust (esp. given the large COVID problem), likely due to its international prominence for equities, as well as its fortuitous hosting of several huge firms that have become more important during the pandemic.

Nonetheless, all the countries and financial markets we analyzed experienced some similar impacts: Decline in GDP (or GDP growth), mostly falling to -5 to -9%

year-on-year by the end of Q1 2020.

Stock markets almost all crashing by 25-35% in the first two weeks of March, but most have recovered at least half of the drop

Market volatilities mostly doubled or tripled.

Government bond rates often spiked briefly in mid March but have mostly fallen by 10-60 bps or more by June relative to the beginning of the year.

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Overview – Cost of Capital Impacts

Perhaps the most visible effect on Cost of Capital is the (mostly, not always) reduced government bond rates. In CAPM terms, this would lower the risk-free rate and might suggest a general reduction in CoC.

However, market volatilities being much higher would tend to push the other way, which is significantly confirmed in US data patterns: Utility stocks have become even more volatile than

the market as a whole. All stocks have become more correlated with each

other, recognizing the shared economic hardship. Utility betas measured with just 2020 daily data are

roughly twice as high as in 2019 or prior years, ― At or a bit above 1.0 vs. often .5-.75 in pre-COVID times.― True for electric, gas, and water utilities.

Market risk premiums derived from monthly DCF evaluations are up about 1% in most countries (with a few declining, especially in the E.U.)

Net effect is that utility cost of equity is probably up.

There are structural reasons for why utility equities are more risky now and likely will remain so for a while, possibly a few years: Shut-off moratoriums for customers unable to pay

bills will cause significant deferred costs. Significant risk of part of commercial customer base

not recovering soon (or at all) from the lockdowns and new protocols.

Short term data spikes are large enough to influence look-back measurements for a few years into the future.

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Comparative COVID-19 Situation in Various Countries

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Stabilizing but Still Growing

Worldwide, COVID incidence is still increasing, as the global death toll has reached over 500,000 as of June 28.2

• As of June 5, the worldwide rate of incidence reached a new high of more than 100,000/day over a 7-day averagehistory.3

Most E.U. and East Asian countries have “flattened the curve” but less so in the U.S. • Can be seen in curves at right, where slope

indicates rate of doubling.

• U.S. infections’ and fatalities’ doubling rates have declined since April, but are still among the highest on a global scale.

Growth Rates in Number of Confirmed COVID-19 Cases1

Note: This analysis omits the Southern hemisphere.

*

* Countries of Interest

**

*

*

* *

Japan*

Source: The Visual Capitalist, data as of June 26, 2020.brattle.com | 7

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Global Incidence Metrics

Out of the countries listed below, the U.S. has the largest COVID incidence, absolutely and (in this sample) per capita, while it falls in the midrange for fatality rate per 100K people. • This is lower than many of the European countries (Spain, U.K., Italy, France, Sweden), but much higher

than has been reported in early lockdown economies like in East Asia

• These metrics can be used as proxies for normalizing comparisons on how the infection has undermined the state of the economies.

Cumulative Deathsper 100,000 People4

Cumulative Infections per 100,000 People4

Source: CNN, data as of June 18, 2020.brattle.com | 8

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Global Financial Sector Impacts

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Global Market Trends – Interest Rates

Yields on 10-year government bonds have generally been constant, with spikes in mid March except in China, South Korea, and Japan.• China has had highest yields (averaging 2.7% in 2020)

and Germany the lowest (averaging -0.4%)

• U.S. and Canadian yields have shown the highest declines since the beginning of the year (-1.1%).

• Germany, Sweden, France, and Japan had negative yields on their 10-year bonds to encourage consumer spending.

• Changes plausibly driven by monetary policy and quantitative easing.

10-Year Government Bond Yields

China (-0.3%)South Korea (-0.2%)Italy (+0.1%)Australia (-0.4%)U.S. (-1.1%)Spain (+0.2%)Canada (-1.1%)U.K. (-0.6%)Sweden (-0.1%)Japan (0.0%)France (-0.1%)Germany (-0.2%)

Differences between 1/7 and 6/15

Change in Stock Price vs. Bond Yields

Source: Bloomberg, data as of June 18, 2020.Note: Decline in stock prices and bond yields shown as of June 15, 2020.

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Economic Indicators

Sovereign debt ratings remain largely unchanged.• Even countries that have been hit the hardest by the pandemic,

e.g., U.S. and Spain, maintain AA+ and A credit ratings.

• Canada, however, has been recently downgraded by Fitch Ratings from AAA to AA+ due to “expanded general government deficit” and expectations of “higher public debt ratios”.6

• Countries with the lowest credit rating saw an increase in government bond yields.

Inflation has decreased and unemployment has generally increased.• Canada, South Korea, Spain, and Italy experienced deflation in

May.

• Canada and the U.S. have had the highest increases in job losses, with unemployment more than doubling and tripling between January and May.

• Most European countries have low unemployment, which has not changed much; likely due to policies on labor protections.

Long Term Foreign Currency Debt Rating, Inflation, and Unemployment5

Inflation (%) Unemployment (%)Country Jan-20 May-20 Jan-20 May-20

U.S. -1.1% AA+ 2.5% 0.1% 3.6% 13.3%Canada -1.1% AAA 2.4% -0.4% 5.5% 13.7%U.K. -0.6% AA 1.8% 0.5% 3.9% 3.9%**Australia -0.4% AAA 1.8%* 2.2%* 5.3% 7.1%China -0.3% A+ 5.4% 2.4% 5.3% 5.9%South Korea -0.2% AA 1.5% -0.3% 4.0% 4.5%Germany -0.2% AAA 1.7% 0.6% 3.3% 3.5%Sweden -0.1% AAA 1.3% 0.0% 7.5% 9.0%France -0.1% Aa 1.5% 0.4% 8.1%* 7.8%*Spain 0.2% A 1.1% -0.9% 13.8%* 14.4%*Italy 0.1% BBB 0.5% -0.2% 9.4% 6.3%**Japan 0.0% A+ 0.7% 0.1% 2.4% 2.6%**

Change in 10Y Govt Bond Yield

LT Foreign Currency Debt Rating

Sources: Bloomberg, data as of June 18, 2020; Trading Economics, data as of June 20, 2020.Notes: *Quarterly (as opposed to monthly) values from March 2020. **Unemployment for April 2020. Inflation rates are year-over-year. S&P Global long-term foreign currency debt ratings shown. There have been no changes in long-term foreign currency debt ratings for any of the countries in the sample since September 2019, with the exception of Canada which was downgraded from AAA to AA+ by Fitch Ratings on June 24, 2020, citing “the deterioration of Canada's public finances in 2020 resulting from the coronavirus pandemic”.6

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0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

1

1.05

1.1

1/7/2020 2/7/2020 3/7/2020 4/7/2020 5/7/2020 6/7/2020

Global Stock Prices

All of the broad market indices of the countries shown have experienced a deep decline since the COVID-19 pandemic, roughly proportional to the severity of their COVID outbreaks and the timeliness/depth of their lockdown – e.g., the Asian countries have relatively smaller losses, compared to some in the E.U. The U.S. is an outlier (discussed on next slide).

National Exchange Stock Indices in 2020

U.S. (-5%)South Korea (-7%)China (-7%)Japan (-9%)Germany (-10%)Sweden (-10%)Canada (-11%)Australia (-16%)France (-20%)U.K. (-20%)Italy (-20%)Spain (-24%)

Source: Bloomberg, data as of June 15, 2020.

Differences between 1/7 and 6/15

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U.S. Outlier

Surprisingly, the US stock market has fallen the least despite having the most COVID cases. This may reflects the prominence of US equity markets in the world financial industry, plus a fortuitous industry mix:• A handful of extremely large firms (bigger than some entire economies) are part of the S&P 500, and they became more important

under social distancing, esp. Apple, Amazon, Google (Alphabet), Microsoft, and Facebook.

• The 5 largest technology companies comprised 18% of the S&P 500 (January 2020) and were responsible for 28% of the price rebound since the low point for the index on March 23.

Market Capitalization (January – June 2020)


S&P 500

Top 5 Companies in S&P 500*

Market Capitalization Decline (March – June 2020)

Gain in S&P 500 and Top 5 Companies in S&P 500 between the lowest point of decline during the COVID-19 period (March 23) and June 24, 2020.

Top 5 Companies % of S&P 500

Difference (Market Cap)

Difference(Percent)

Gain in S&P 500 Market Capitalization (March 23 - June 24, 2020)

$7.031Tr 36.4%

Gain in Top 5 Companies Market Capitalization (March 23 - June 24, 2020)

$1.958Tr 47.7%

Percent Gain in S&P 500 due to Top 5 Companies 27.9% -

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Source: Bloomberg, data as of May 29, 2020.

Volatility of Global Stock Indices

In all countries, stock market volatility spiked in March 2020 at 3-4x normal levels, but by May had mostly subsided to about twice 2019’s (more typical) levels.

European markets remain the most volatile, China the least (actually having declined).

Annualized Standard Deviation of Historical Returns

U.S. South Korea China Japan Germany Sweden Canada Australia France U.K. Italy Spain

Total Decline in Stock Price Since January 7

-5% -7% -7% -9% -10% -10% -11% -16% -20% -20% -20% -24%

Standard Deviation2019 12.4 12.7 18.0 13.7 14.1 14.0 7.3 11.0 13.3 11.8 14.6 12.52020 (January - May) 48.9 37.7 23.2 35.5 43.4 38.6 49.0 41.3 43.0 39.0 47.5 43.3

March 2020 93.1 66.6 29.3 57.2 73.3 61.3 98.0 76.6 75.3 68.4 85.7 77.8April 2020 41.2 29.6 14.0 35.3 41.6 37.0 36.0 31.7 38.1 36.4 37.7 34.0May 2020 22.9 18.7 11.4 22.8 33.1 35.4 15.9 27.1 33.2 26.8 29.8 31.5

Ratio of May 2020 / 2019 1.8 1.5 0.6 1.7 2.3 2.5 2.2 2.5 2.5 2.3 2.0 2.5

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Global Trends – Market Risk Premiums

Market risk premium, measured with DDM model, increased dramatically during March, then fell back down somewhat.• Maximum 7-day rolling average of all countries

reached 11.6% on March 23 – often matching highest levels in the Global Financial Crisis of 2008.

• Over the entire period from January 7 to June 15, the average risk premium across all countries increased 60 bps from 9.3% to 9.9%.

• South Korea, the U.K., and Japan have the largest increase, while four countries (France, Sweden, China, and Germany) show a decrease in their MRP.

• Australia has lowest market risk premium on average, followed by the U.S. and Canada.

Market Risk Premium

South Korea (+2.6%)Italy (+1.0%)Japan (+1.7%)Sweden (-0.8%)U.K. (+1.8%)Spain (+0.1%)Germany (-0.3%)Canada (+1.2%)China (-0.6%)France (-1.1%)U.S. (+1.1%)Australia (+0.2%)

Differences between 1/7

and 6/15

Source: Bloomberg, data as of June 18, 2020.Notes: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model (DDM); consistent with a market value capital structure.Premium comparisons not normalized for typical variance.

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Country Comparison Summary

Note: Sources can be found in the Appendix, individual country slides.

There is no simple pattern of which countries had relatively more COVID exposure (upper rows) vs. financial impacts (lower rows). Red boxes indicate largest impact, green indicate smallest.

U.S. South Korea Japan China Sweden Canada Germany Australia U.K. France Italy Spain

Infected Numbers per 100K People 664 24 14 6 550 274 229 30 452 284 394 525

Death Rates per 100K People (as of June 18, 2020)

36 1 1 <1 50 23 11 <1 64 44 57 58

Lock Down Date (Dates may vary based on geography)

3/20(varies by state)

None None 1/24 None 3/12 3/23 - 5/10 3/30 3/23 3/18 - 5/11 3/11 - 6/3 3/15 - 5/25

YoY Decline in GDP (as of April 2020) -5.9% -1.2% -5.2% 1.2% -6.8% -6.2% -7.0% -6.7% -6.5% -7.2% -9.1% -8.0%

% of Net Trade of GDP (Year end 2018) -3.1% 5.0% 0.3% 0.8% 2.5% -2.0% 6.2% 0.4% -1.8% -0.8% 2.5% 2.7%

Total Decline in Stock Price (January 7 - June 15)

-5.3% -6.7% -8.7% -6.9% -10.1% -10.5% -9.9% -16.2% -19.9% -19.9% -20.0% -24.2%

10- Year Govt Bond Yields(as of June 15, 2020) 0.7% 1.4% 0.0% 2.8% 0.0% 0.5% -0.4% 0.9% 0.2% 0.0% 1.3% 0.6%

YoY Change in Govt Bond Yield(since June 14, 2019) -1.4% -0.2% 0.1% -0.5% 0.0% -0.9% -0.2% -0.5% -0.6% -0.1% -0.7% 0.1%

Market Risk Premium (as of June 15, 2020) 8.0% 13.4% 11.0% 8.4% 10.9% 9.2% 10.3% 6.7% 10.8% 8.0% 11.4% 10.6%

YoY Change in MRP(since June 14, 2019)

0.6% 3.6% 1.1% -0.7% -5.8% 1.3% -0.8% 0.0% 0.6% -1.1% 1.7% 1.9%

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U.S. Financial Sector Impacts

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Utility vs. Fed Bond Credit Spreads

Utility BBB bond spreads over 20 year treasury yields are up 20 basis points since the end of February.• BBB yields up due to increased risk.

• In contrast, treasury yields are down about 22 basis points due to flight to quality behaviors and quantitative easing.

Compared to embedded rates, utility borrowing may be inexpensive now (and many utilities are refinancing). • However, this opportunity has become

somewhat more costly due to COVID.

Credit Spread between 20 Year U.S. Treasury & Utility BBB Bonds


0%

1%

2%

3%

4%

5%

6%

1/2 2/2 3/2 4/2 5/2 6/2

1.90

3.20

2.39 2.23 2.10

20 Year BBB Utility Bond Yields

20 Year Treasury Yields

Yield Spread

1.241.46

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Industry Composition of S&P 500

The S&P 500 is comprised of primarily IT, health care, finance, and consumer companies. • Energy and utilities account for slightly more than 6% of the total index.

Source: Bloomberg, data as of May 29, 2020.

Industry Composition of S&P 500Broken down by Number of Members

The relative large share of the U.S. index coming from high tech and IT partly explains its resilient stock market.

Other countries with more dependence on energy (especially oil), raw materials and exports, or tourism are likely to be harder hit by COVID.

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U.S. Required Returns

Current implied return expected for the market is about at 2019 levels, but the composition is very different.• Implied returns rose steadily from the

beginning of 2020 through March, but declined in April and May.

• Ten-year government bond rates are about 140 bps lower than the 2019 average, while the 8.1% MRP is about 100 bps higher, which results in a market return that is comparable to the 2019 average of 9.2%.

Expected U.S. Market Returns (S&P 500)

Source: Bloomberg, data as of June 18, 2020.Notes: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model.Risk-free rate is based on 10-year U.S. Treasury yield. Return based at approx. 70% equity capital structure.

DDM-implied Market Return

Market Risk Premium

Risk-Free Rate

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Heightened Volatility

During the economic downturn due to COVID-19, the VIX volatility index reached an all time high of 83 in March.• It remains high at approximately 35 on June 15th, well above the long-run average of 19.3.

• VIX has climbed higher recently on fears of a second outbreak.7

Volatility Index (VIX) Performance

Long Run Average: 19.3(1/2/1990 – 6/15/2020)

Peak during Financial Crisis of 80.86 (11/20/2008)

VIX climbs back upto 40.79

(6/11/2020)

VIX reaches all time high of 82.69 (3/16/2020)

Source: Bloomberg, data as of June 15, 2020.brattle.com | 21

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Performance of Utility Index

Volatility of General & Utility IndexAnnualized Daily Standard Deviation

Utility Index Stock Price PerformanceIndexed from February 2020


Utility Index

S&P 500

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2/3 2/17 3/2 3/16 3/30 4/13 4/27 5/11 5/25 6/8

U.S. utility index moved in close conjunction with the market through mid-April, but more recently has lagged behind the general market in recovery.• The utility index was down 15% from February 3 to June 15, compared to S&P 500 decline of 6%.• But volatility of utility stocks in 2020 has exceeded that of the overall market, contrary to normal patterns.

S&P 500

Utility Index

2019 12.4% 11.5%2020 (January - May) 48.9% 56.0%

March 2020 93.1% 105.1%April 2020 41.2% 55.1%May 2020 22.9% 27.5%

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31May 31

DifferenceImpact on ROE

(Assumed 8% MRP)

Electric 0.51 1.03 0.52 +4.1%Gas 0.55 1.11 0.55 +4.4%Water 0.59 1.01 0.42 +3.3%

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Electric Utility Betas

Four-month daily betas have increased across U.S. electric, gas and water utilities from January 31 to May 31, more than doubling on average • Similar increases in utility betas occurred during the Global Financial Crisis.• These increases in beta would call for 300-400 bps increase in ROE under CAPM.

Electric Utility 4-Month Daily Betas

Source: Bloomberg, data as of May 31, 2020.Note: *PG&E is not included in sample average due to bankruptcy restructuring.

January 31 Average: 0.51*May 31 Average: 1.03*

Utility 4-Month Daily Beta Averages

It is possible these changes are transitory, but there are structural reasons to expect them to persist, esp. utility funded moratoriums on shutting off delinquent accounts, and increased utility exposure to macro recovery of the commercial sectors of the economy. brattle.com | 23

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Conclusions

COVID has increased volatility and associated risk metrics in most countries, somewhat proportionally to how severe the incidence was … but not in any precise relation.• The EU countries hit hardest by COVID-19 generally experienced the greatest downturn in stock prices (i.e., Italy, Spain, U.K.), while

countries such as China and South Korea that have lower numbers of reported deaths per 100K people experienced lower stock pricedeclines.

• Price levels in the US stock market are a significant outlier, possibly due to its diverse composition and inclusion of substantial IT and internet platform mega-firms – though its volatility increased more than most markets

Out of the country sample analyzed, there have been no S&P sovereign credit downgrades due to the pandemic.* • Utility or corporate bonds do not necessarily follow the government bond yield, so the impact on cost of debt is uncertain.

The Market Risk Premium increased in all countries in March and has remained elevated in all countries but China, France, Germany, and Sweden (where it has declined).

There is clear evidence that the cost of equity, at least in the US, has increased due to higher betas and greater exposure to macroeconomic conditions. How long this will persist depends on the shape of the recovery.

It may be very appropriate to have utilities defer cost recovery in this environment that is so fragile and painful for their customers, but COVID is not a reason to lower their allowed returns.

Note: *Canada was downgraded from AAA to AA+ by Fitch Ratings on June 24, 2020, citing “the deterioration of Canada's public finances in 2020 resulting from the coronavirus pandemic”.6

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Appendix: Country-Specific Observations

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Canada

Canada has experienced some of the highest volatility in its market, and is ultimately down around 11% since the beginning of 2020, in the midrange of the 12 countries in our sample. • Canada’s social distancing policy varies across the country, but began generally around March 12, with

gathering restrictions, but limited Provincial lockdowns.8

• Canada’s index is comprised of primarily materials and industrials companies, but the index has significantly more energy & utility companies than the U.S., with more than 20% of the overall index made up of energy & utility.

Expected Canadian Market Returns

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Bank of Canada Treasury yield.

S&P/TSX Composite Index

229 Members

Summary Statistics 4,8,9,10


Market Risk Premium

Risk-Free Rate

Canada


23


3/12

YoY Decline in GDP (as of April 2020) -6.2%

% of Net Trade of GDP (Year end 2018) -2.0%


-10.5%

YoY Change in Govt Bond Yield(since June 14, 2019) -0.9%


1.3%

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United Kingdom

The U.K. has experienced some of the highest death rates and largest stock decline in our sample, and is ultimately down around 20% since the beginning of 2020. • The U.K. issued its stay-at-home order on March 23 but began slowing easing restrictions for certain business in

early May; however, the government is still encouraging people to work from home and limit social gatherings.11,12

• The U.K.’s index has a diverse industry breakdown, with financials, healthcare, energy, and consumer staples comprising the majority of the index.

• Implied market returns have increased by 10 basis points in May, and remain 150 basis points above the December 2019 market return.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Bank of England bond yield.


Market Risk Premium

Risk-Free Rate

Summary Statistics4,9,10,12,13

FTSE 100 Index

100 Members

Expected U.K. Market Returns

U.K.


64


3/23




-19.9%



0.6%

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Germany

Germany has experienced moderate market declines of 10% since the beginning of January, with a low reported death rate.

• Germany enforced lockdowns from late March through beginning of May, and kept their death rate down to 11 per 100,000 people.4,14

• Implied market returns have increased by 10 basis points in May, and remain in line with pre-2020 levels of around 10% market return.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Deutsche Bundesbank bond yield.

DAX Index

30 Members

Expected German Market Returns

Summary Statistics4,9,14


Market Risk Premium

Risk-Free Rate

Germany


11


3/23 - 5/10


% of Net Trade of GDP (Year end 2018) 6.2%


-9.9%



-0.8%

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France

France has experienced some of the largest stock market declines, with a 20% decline since beginning of 2020, aligning with their high death rate of 44 deaths per 100,000 people.4

• France enforced strict social distancing lockdowns from mid-March through mid-May.15

• Implied market returns have decreased by 50 basis points in May, and remain 70 basis points below pre-2020 levels.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Banque de France bond yield.

CAC 40 Index

40 Members

Expected French Market Returns



Market Risk Premium

Risk-Free Rate

France


44


3/18 - 5/11




-19.9%



-1.1%

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Italy

Italy has experienced some of the worst stock price declines and COVID-19 death rates in our sample, with a 20% decline in stock price and high death rate of 57 deaths per 100,000 people.4

• Italy issued strict social distancing lockdowns from March through June, in an attempt to keep their high death rate down.16

• Implied market returns have decreased by 60 basis points in May, but remain 170 basis points above pre-2020 levels.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Banca d’Italia bond yield.

FTSE MIB Index17

40 Members

Expected Italian Market Returns



Market Risk Premium

Risk-Free Rate

Italy


57


3/11 - 6/3




-20.0%



1.7%

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Spain

Spain’s stock has decreased the most out of our sample, down by about 24% compared to the beginning of the year; despite strict lockdown policies, Spain has experienced the second highest death rate due to COVID-19 out of the sample. • The Spanish government issued some of the strictest lockdown policies in the world from mid-March to late May.18

• Almost a quarter of the Spanish Index is comprised of utilities, with another 20% coming from financial companies.

• Implied market returns have increased by 40 basis points in May, after declining by 90 basis point in April, returning it to pre-2020 levels.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Banco de España bond yield.

IBEX 35 Index

35 Members

Expected Spanish Market Returns



Market Risk Premium

Risk-Free Rate

Spain


58


3/15 - 5/25




-24.2%

YoY Change in Govt Bond Yield(since June 14, 2019) 0.1%


1.9%

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Sweden

Sweden’s stock is down about 10% compared to the beginning of the year; its death rate is in the upper range of death rates in our sample, while the government has not issued mandatory lockdowns. • Sweden’s index is comprised of predominantly industrials, followed by financials. The index contains zero utilities.

• Implied market returns have increased by 20 basis points in May, after declining by 90 basis points in April. As shown, Swedish market returns have experienced large volatility over the past year and a half, with the current market return below pre-2020 levels, but 50 basis points above January 2020 levels.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Sveriges Riksbank bond yield.

OMX Stockholm 30 Index

30 Members

Expected Swedish Market Returns



Market Risk Premium

Risk-Free Rate

Sweden


50


None




-10.1%



-5.8%

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Australia

Australia has experienced a 16% drop in stock prices since the beginning of 2020, which is on the high end of our range, despite reporting low death rates.

• Australia began social lockdowns on March 30, which is still ongoing today.20

• The reported death rate is less than 1 death per 100,000 people.4

• Implied market returns have remained constant in May and are around pre-2020 levels.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Reserve Bank of Australia bond yield.

S&P/ASX 200

200 Members

Expected Australian Market Returns



Market Risk Premium

Risk-Free Rate

Australia


<1


3/30




-16.2%



0.0%

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Japan

Japan’s stock is down about 9% compared to the beginning of the year, on the lower end of the stock decline range, which aligns with their reportedly low death rates (1 per 100,000 people).4

• Japan has not implemented social distancing lockdowns, but has still reported low death rates.

• Japan’s index is comprised primarily of industrials, IT, health care and discretionary consumer companies.

• Implied market returns have increased by 70 basis points in May, and are 110 basis points above pre-2020 levels.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Bank of Japan bond yield.

Nikkei 225

225 Members

Expected Japanese Market Returns



Market Risk Premium

Risk-Free Rate

Japan


1


None




-8.7%



1.1%

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China

China’s stock is down about 7% compared to the beginning of the year, while the government has issued strict lockdowns beginning in January and reports low death rates (<1 per 100,000 people).

• China’s index is comprised of predominantly financial companies, followed by industrials.

• Implied market returns have increased by 10 basis points in May, but remain 80 basis points below pre-2020 levels.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year People’s Bank of China bond yield.

Shanghai Stock Exchange Index

1,553 Members

Expected Chinese Market Returns

Summary Statistics4,9,22,23


Market Risk Premium

Risk-Free Rate

China


<1


1/24

YoY Decline in GDP (as of April 2020) 1.2%



-6.9%



-0.7%

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South Korea

South Korea’s stock is down about 7% compared to the beginning of the year, while the government has not issued mandatory lockdowns but is reporting low death rates.• South Korea reported low death rates (1 per 100,000 people) due to its comprehensive contract tracing

efforts.4

• South Korea’s index is comprised primarily of industrials, materials, and discretionary consumer companies.

• Implied market returns have increased by 60 basis points in May, and remain 246 basis points above the pre-2020 levels.

Source: Bloomberg, data as of June 18, 2020.Note: Market return estimated by Bloomberg with a forward-looking Dividend Discount Model. Risk-free rate is based on 10-year Bank of Korea bond yield.

KOSPI Index

787 Members

Expected South Korean Market Returns



Market Risk Premium

Risk-Free Rate

South Korea


1


None




-6.7%



3.6%

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Sources

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Sources

1: Nick Routley, “Infection Trajectory: See Which Countries are Flattening Their COVID-19 Curve,” Visual Capitalist, March 16, 2020. Accessed June 26, 2020, https://www.visualcapitalist.com/infection-trajectory-flattening-the-covid19-curve/.2: “The Global Death Toll Now Tops 500,000”, The New York Times, June 29, 2020, “https://www.nytimes.com/2020/06/28/world/coronavirus-updates.html3:Reynolds, Emma and Pettersson, Henrik, “Confirmed coronavirus cases are rising faster than ever”, CNN, June 5, 2020, https://www.cnn.com/2020/06/05/world/coronavirus-cases-rising-faster-intl/index.html4: Henrik Peterson, Byron Manley, Sergio Hernandez, “Tracking coronavirus’ global spread,” CNN, June 18, 2020. Accessed June 18, 2020, https://www.cnn.com/interactive/2020/health/coronavirus-maps-and-cases/.5: Trading Economics, Country Economic Indicators. Accessed June 20, 2020, https://tradingeconomics.com/countries.6: “Rating Action Commentary Fitch Downgrades Canada's Ratings to 'AA+'; Outlook Stable,” Fitch Ratings, June 24, 2020. Accessed June 25, 2020, https://www.fitchratings.com/research/sovereigns/fitch-downgrades-canada-ratings-to-aa-outlook-stable-24-06-2020. 7: April Joyner, “Wall Street’s ‘fear gauge’ jumps on fears of coronavirus resurgence,” Reuters, June 11, 2020. Accessed June 19, 2020, https://www.reuters.com/article/us-health-coronavirus-vix/wall-streets-fear-gauge-jumps-on-fears-of-coronavirus-resurgence-idUSKBN23I3BJ.8: Institute for Health Metrics and Evaluation, “COVID-19 Projections: Canada.” Accessed June 15, 2020, https://covid19.healthdata.org/Canada. brattle.com | 38

https://www.visualcapitalist.com/infection-trajectory-flattening-the-covid19-curve/

https://www.nytimes.com/2020/06/28/world/coronavirus-updates.html

https://www.cnn.com/2020/06/05/world/coronavirus-cases-rising-faster-intl/index.html

https://www.cnn.com/interactive/2020/health/coronavirus-maps-and-cases/

https://tradingeconomics.com/countries

https://www.fitchratings.com/research/sovereigns/fitch-downgrades-canada-ratings-to-aa-outlook-stable-24-06-2020

https://www.reuters.com/article/us-health-coronavirus-vix/wall-streets-fear-gauge-jumps-on-fears-of-coronavirus-resurgence-idUSKBN23I3BJ

https://covid19.healthdata.org/Canada

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Sources

9: “Real GDP Growth: Annual Percent Change,” International Monetary Fund (World Economic Outlook, April 2020). Accessed June 9, 2020, https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD.10: “Imports/Exports of goods and services (% of GDP)”, The World Bank, Data as of End of Year 2018, Data accessed June 29, https://data.worldbank.org/indicator/NE.IMP.GNFS.ZS11: “Boris Johnson speech: PM unveils ‘conditional plan’ to reopen society,” BBC News, May 10, 2020. Accessed May 29, 2020, https://www.bbc.com/news/uk-52609952.12: “Lockdown update: All you need to know about new measures,” BBC News, June 10, 2020. Accessed June 10, 2020, https://www.bbc.com/news/explainers-52530518.13: Institute for Health Metrics and Evaluation, “COVID-19 Projections: United Kingdom.” Accessed June 15, 2020, https://covid19.healthdata.org/united-kingdom.14: Institute for Health Metrics and Evaluation, “COVID-19 Projections: Germany.” Accessed June 15, 2020, https://covid19.healthdata.org/germany.15: Institute for Health Metrics and Evaluation, “COVID-19 Projections: France.” Accessed June 15, 2020, https://covid19.healthdata.org/france. 16: Institute for Health Metrics and Evaluation, “COVID-19 Projections: Italy.” Accessed June 15, 2020, https://covid19.healthdata.org/italy.

brattle.com | 39

https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD

https://data.worldbank.org/indicator/NE.IMP.GNFS.ZS

https://www.bbc.com/news/uk-52609952

https://www.bbc.com/news/explainers-52530518

https://covid19.healthdata.org/united-kingdom

https://covid19.healthdata.org/germany

https://covid19.healthdata.org/france

https://covid19.healthdata.org/italy

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Sources

17: “FTSE Russell Factsheet, FTSE MIB Index”, FTSE Russell, May 29, 2020, page 2. Accessed June 23, 2020, https://research.ftserussell.com/Analytics/Factsheets/Home/DownloadSingleIssue?issueName=FTSEMIB&IsManual=false.18: Institute for Health Metrics and Evaluation, “COVID-19 Projections: Spain.” Accessed June 15, 2020, https://covid19.healthdata.org/spain. 19: Institute for Health Metrics and Evaluation, “COVID-19 Projections: Sweden.” Accessed June 15, 2020, https://covid19.healthdata.org/sweden. 20: National Cabinet Statement, Prime Minister of Australia, March 29, 2020. Accessed June 23, 2020, https://www.pm.gov.au/media/national-cabinet-statement.21: Institute for Health Metrics and Evaluation, “COVID-19 Projections: Japan.” Accessed June 15, 2020, https://covid19.healthdata.org/japan. 22: “Hubei Timeline”, Johns Hopkins University of Medicine. Accessed June 23, 2020, https://coronavirus.jhu.edu/data/hubei-timeline. 23: Chris Buckley and Keith Bradsher, “Beijing’s Partial Lockdown a Sign of the World’s New Normal,” The New York Times, June 17, 2020. Accessed June 23, 2020, https://www.nytimes.com/2020/06/17/world/asia/coronavirus-beijing-china.html. 24: Charlie Campbell, “South Korea’s Health Minister on How His Country is Beating Coronavirus Without a Lockdown,” Time Magazine, April 30, 2020. Accessed June 23, 2020, https://time.com/5830594/south-korea-covid19-coronavirus/.

brattle.com | 40

https://research.ftserussell.com/Analytics/Factsheets/Home/DownloadSingleIssue?issueName=FTSEMIB&IsManual=false

https://covid19.healthdata.org/spain

https://covid19.healthdata.org/sweden

https://www.pm.gov.au/media/national-cabinet-statement

https://covid19.healthdata.org/japan

https://coronavirus.jhu.edu/data/hubei-timeline

https://www.nytimes.com/2020/06/17/world/asia/coronavirus-beijing-china.html

https://time.com/5830594/south-korea-covid19-coronavirus/

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For more information, contact …

Brattle.com | 41

Bente Villadsen Robert S. Mudge Frank C. Graves

[email protected]

+1.617.864.7900

[email protected]

+1.202.955.5050

[email protected]

+1.617.864.7900

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Global Impacts and Implications of COVID-19 on Utility Finance · The U.S. stock market has been surprisingly robust (esp. ... Global Stock Prices. All of the broad market indices